McDonald's to Exit Russia; Shares Still Rich

Wide-moat McDonald's MCD announced its exit from the Russian market with a May 16 press release detailing its plans to disassociate from its approximately 850 stores in the country. This move was already contemplated in our base-case scenario, with our forecasts stripping out the revenue (9%), operating profit (3%), and forward unit growth from Russia and Ukraine. Consequently, we anticipate no material changes to our $227 fair value estimate. Our view appears to have been priced in to the markets already, with minimal price action in early trading. The shares continue to look expensive at current market prices. The deal is in effect a real estate transaction, with the McDonald's branding (including the trademark golden arches) set to be stripped from those units, which will be transferred to local owners. In conjunction with the deal, the firm will likely recognize a $1.2 billion-$1.4 billion accounting charge while recognizing foreign-exchange losses previously carried in shareholders' equity. McDonald's actions could foreshadow other Western brands' response to company-owned operations in the region, in our view, but direct impacts look de minimis (low-single-digit percentage of operating income) for most restauranteurs in our coverage. McDonald's decision to exit Russia reflects building pressure from consumers boycotting companies that continue to operate in that market and a renewed orientation to values that has emerged under CEO Chris Kempczinski's leadership in the past couple of years as the firm seeks to reconnect its brand to younger, values-driven consumers.